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Market Entry in India: the Curious Case of Starbucks Market Entry in India: The Curious Case of Starbucks Dominik Fischer Zeppelin University Kaushik Roy Indian Institute of Management Calcutta Abstract We examine Starbucks’ entry strategy in India, as well as the antecedents to the entry. Employing Dunning's eclectic paradigm and Ghemawat's AAA framework offers unique insights to understand the entry. By analyzing publicly available data, we undertake an in-depth case study. We argue that Starbucks simultaneously enjoyed ownership, location, and internalization advantages, and thus, aptly chose equity participation as the entry mode. Our unique contribution lies in concluding that Starbucks enjoyed high, medium, and low advantages for Ghemawat's dimensions of adaptation, aggregation, and arbitrage. Further, we introduce extensions to the AAA framework. Introduction Economic liberalization through changing institutions fuels the growth of emerging economies. Enterprises need adequate strategies to deal with a fast-changing environment and unknown institutions in this context.1 A few empirical studies focusing on the entry success of multinational corporations have made relevant contributions to this topic as stated by Johnson & Tellis.2,3,4,5 However, these studies suffer from significant limitations, often rooted in time-specific contexts and a restrictive definition of success, such as market share, which is too narrow for a comprehensive evaluation.5 We examine how Starbucks entered India through a strategic alliance and then successfully competed in this market, by employing the “ownership – location – internalization” (O-L-I) eclectic paradigm,6,7,8,9 as well as the “adaptation – aggregation – arbitrage” (AAA) framework,10 and thereby proposing specific additions to the AAA framework. The uniqueness and 124 Rutgers Business Review Fall 2019 Market Entry in India: The Curious Case of Starbucks idiosyncrasy offered by the Indian market drive the choice of this single organization as a case.11,12 The internal motives of entering strategic partnerships and business relationships are rooted in transaction cost theory and the resource dependence theory.13,14,15 Partnerships, particularly in emerging markets are means of risk sharing.16 Often, firms collaborate to access new markets17 or resources.18 To choose an appropriate partner is the key for successful alliance management.19 Firms controlling strategic resources that are difficult to access are the most successful ones.20 Distinct from the resource- and industry-based views, the “strategy tripod” includes the institution-based view of international business strategy.21,22 The institutional consideration can be transferred to alliances in that they are not only a tool for accessing resources or markets but also for dealing with a new and unknown institutional environment.22 Starbucks Corporation is a coffeehouse chain headquartered in Seattle. It has in excess of 28,000 stores in more than 60 countries, and is the largest coffeehouse chain in the world, ahead of Costa Coffee of the United Kingdom.23,24 Starbucks serves beverages, whole-bean and instant coffee, tea, pastries, and snacks. Most outlets also sell merchandise such as branded mugs.25 The company has been expanding its footprint rapidly, with two stores opening every day on average since 1987.26 After an extended period of an exclusive focus on North America, Starbucks decided to expand overseas. The first move outside North America was with a joint venture (JV) in Japan.27 Whenever possible, the company tries to control and internalize the whole value chain,28 and thus avoids partnerships. India has become a central player in the world economy;29 it is currently the seventh largest economy in total and is the second most important emerging market according to its gross domestic product (GDP),30 with growth rates consistently at the top of the world rankings and currently growing faster than China.31 However, most of the research that studied internationalization in emerging economies focused on China as the setting. In earlier days, companies entered these markets to access low-cost factors, acquire resources, and secure supply,32,33 whereas today the primary motivation is seeking new markets. In general, market entry into India is less successful compared to China, which makes India more challenging for corporations and consequently a more exciting field for research.33 This paper is an outcome of a case-based research.34 The choice of a single case, namely, Starbucks, was justified as it offered a unique setting11 of an initial false start followed by a joint venture-based foray in the emerging economy of India. We scanned the internet for all the relevant newspaper articles and other pieces that reported any information concerning Rutgers Business Review Vol. 4, No. 2 125 Market Entry in India: The Curious Case of Starbucks Starbucks’ market entry in India. After that, we organized the information chronologically for the event study. Next, we prepared the case based on the mapping of the developments with the AAA and the OLI frameworks. Both the authors undertook the analysis independently, and convergence in the findings triangulated the results and avoided any possible interpretation bias.35 Starbucks' entry into the Indian market After a false start in 2007 with an Indonesian franchise partner and the Indian Future Group,36 Starbucks finally announced its plan to enter India in 2011.37 Early entry has several benefits,38 such as access to critical resources and markets in an Indian perspective.39 Starbucks had to be cautious due to the earlier missed opportunity, and therefore entered India through a 50:50 JV between Tata Global Beverages and the Starbucks Corporation, branded as “Starbucks – A Tata Alliance.” The selection of a local partner in emerging markets is primarily a crucial step in establishing a successful business there.40 For Tata Starbucks Ltd, the coffee is sourced and roasted locally.41 It is the first time that the enterprise runs an outlet based on a partner-owned roasting facility outside its plants.42 The case is a typical example of a collaboration between an emerging market firm and a firm from a developed country.43 Starbucks offers the conventional resources of a company entering emerging markets, such as technical capabilities, intangible resources, and willingness to share expertise, what is demonstrated clearly through a strong brand.43 Starbucks’ specialized technical knowledge in building unique stores is beneficial for its global operations. The outlets provide the atmosphere of a local coffee shop rather than that of a fast food restaurant.44 Tata offers access to India-specific resources, local market knowledge, and a strategic network.43 Through this alliance, Starbucks also obtained the expertise to deal with an unknown institutional environment, which is an additional strategic advantage.21 Why does Starbucks go abroad? The reasons for a company’s international expansion span four categories.9 First is market seeking, in which corporations aim to satisfy a particular or several foreign markets through their product. Consequently, it would be a demand-seeking FDI. Second, there are resource-seeking companies, trying to gain access to natural resources, knowledge, or labor. These are instances of supply-oriented FDIs. Third, there are efficiency- seeking firms. They are searching for a more efficient division of labor or try to specialize their existing portfolio of assets. Fourth, there are strategic asset-seeking companies. They mainly work to protect their ownership 126 Rutgers Business Review Fall 2019 Market Entry in India: The Curious Case of Starbucks advantage through the acquisition of assets.8,45 Seeking a new market is the primary reason for Starbucks’ entry into India. India is a high-growth market that is under-penetrated46 making it an appropriate destination for Starbucks to expand its footprint. Furthermore, Starbucks has attained better access to a supplier through the JV, so that the company exploits sourcing capabilities. The JV with Tata has given Starbucks access to a local network and firms.47 Analyzing Starbucks’ market entry based on Dunning’s Eclectic Paradigm Three factors are crucial for determining the overseas activities of corporations: ownership-specific advantages, location advantages, and internalization advantages.6, 7, 8, 9 Ownership advantages Ownership-specific advantages are rooted in the tangible or intangible resources owned by a corporation.48 These resources can be seen as providing an advantage over competitors in the foreign market8 and are mainly rooted in the resources a specific firm controls or accesses.48 Larger firms tend to have more resources than smaller ones when it comes to ownership advantage.5,49 One of the most critical resource is a trademark. Starbucks is aware of the value of its global brand, mainly that customers perceive Western brands as offering quality and service, ready to establish a premium brand in emerging markets.5,50 The “Starbucks” brand was trademarked in 10 Indian languages as early as 2008, demonstrating Starbucks’ interest in protecting its brand-based competitive advantage.51 The cups serve as mobile billboards and additional advertising items.52 The overall brand signals pleasure from various sensory modalities, such as the great aroma of its coffee specialties and providing aurally pleasing retail outlets allowing relaxation.53 In a way, Starbucks also sells lifestyle and attitude. Therefore, customers are willing to pay premium prices.54
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